Tuesday, July 29, 2008

I am an urban planner; an urban planner am I. Two graduate degrees. Even did a bit of planning here and there, in addition to merely teaching or thinking about it. Married to a planner. (That's us above, back when, young and in love with the city.) We have Planning magazines piled up around the house. We argue about planning at breakfast, lunch and dinner. Tell planning jokes. The kids think planning is something all parents everywhere do, like correcting one's manners, mainly to bore their children.

This was not always exclusively so. Even in my master's program I thought it might be useful to learn more about the economics of cities. Partly, this was because economics was hard, and I guessed in-school was a better place to learn hard stuff than out-of-school. (Of course, I never got out of school but didn't realize I'd fallen into that trap until much later.) And partly it kept making sense. Supply and demand? Prices at the margin? Market failure? Wow. Since my motivating interest in planning was "housing and poverty," these concepts seemed, at the very least, useful.

So I started to study economics in earnest. I chose a PhD program at a university with a strong program in urban and public economics, and a planning program with great flexibility in which courses to take. (My first advisor, Bennett Harrison, said "go for it.") Took 4 half-semester grad sequence in micro (instructors, in this order: Solow, McFadden, Weitzman and Samuelson -- hmmm, 3 nobels among them now, with Weitzman in many ways the most inventive teacher), some econometrics (Hausman, Fisher, McFadden), some macro (Dornbusch, Fischer, Summers), lots of public economics (Diamond, Maskin, Friedlaender, Summers -- and a trip across town for Auerbach and Feldstein), and urban (Rothenburg, Wheaton, Kain).*

Not to complain, but it was terribly hard. I didn't have the math or econ background. My brain got full early on, overflowing all over the place, and I was generally the weakest student in the room, just hanging on, barely passing, but it kept seeming useful for understanding housing and poverty -- and cities -- and, on the side, I was learning how economists characterized "interesting" questions, challenges and gaps in their literatures.

In fact, by then I wanted to be an economist. I decided to study the links between urban economics and public economics in my dissertation work. I got a job in an economics department, taught micro theory and urban/public economics for several years, and published a bit in those journals. Then I realized at some point that I wasn't interested in yet more theory, or economics journals as such, and it was time to repatriate my human capital back to the planning world -- where it was considered ok to study a local community problem just because it was a problem, even if the economics literature didn't necessarily consider it a problem.

So I moved on. To UC Irvine, where I taught planning until 1999, then here to UCLA. But as anyone who has worked with me knows, when faced with a question or problem, I first want to know where the prices are, so I can picture what the budget lines are doing in quantity space.

If I can't squeeze it into a budget line/indifference curve story line, I generally don't get it. But I no longer start to explain this with an indirect utility or conditional expenditure function.

Which brings us to today. My urban economics theory catalog is dusty and low profile, and even buried in my cv, so I'm listing that work here to indulge in an enjoyable recollection of past events. With the original awkward abstracts. Because I can. Ha!

Standard urban models assume residents never think about their next job. More likely, the individual value of a given home and the choice of commute length are based not only on the current job site, but also on the expectation of where future jobs will be and the likelihood of both job separations and residential moves. The first factor lessens the value of access to the present job, while the second determines the opportunity cost of moving. Both sets of factors lead to flatter rent gradients and more sprawl than predicted by standard theories. The analysis further suggests that relatively stable jobs are likely associated with relatively shorter commutes. Past studies of the regional balance of jobs and housing, of "wasteful" commuting, of differences in the length of commute by gender, and of spatial tests for discrimination in housing and local labor markets have neglected these considerations, and may yield biased results as a consequence.

A major attraction of the popular and influential planning movements known as the new urbanism, transit-oriented development, and neotraditional planning are their presumed transportation benefits. Though the architects and planners promoting these ideas are usually careful to emphasize the many ingredients necessary to obtain desired results—straightening of streets to open the local network, "calming" of traffic, better integration of land uses and densities, and so on—a growing literature and number of plans feature virtually any combination of these elements as axiomatic improvements. The potential problem is that the traffic impacts of the new plans are generally indeterminate, and it is unclear whether designers understand the reasons well enough to avoid unintended results. This paper proposes a simple behavioral model to identify and assess the tradeoffs these ideas impose on transportation and subdivision planners.

How is charitable giving within a city influenced by the prospect of donor and recipient migration? The theoretical literature on charitable contributions in a closed economy has mainly argued that the market level of private giving will tend to be lower than optimal, wherever there exists a local fiscal externality between donors and recipients. Interjurisdictional models of voluntary redistribution, on the other hand, abstract from altruism to explore the interjurisdictional fiscal externality resulting from the failure of one community to account for the migration impacts of its actions on other communities. This paper integrates and extends both literatures by allowing for local altruism among the mobile residents of a system of local economies. Within a single community, mobility thus introduces adverse selection considerations for each donor via the migration of both recipients and other donors. Moreover, any change in the local transfer level influences both equilibrium wages and donor behavior system-wide.

The analysis demonstrates that the market level of local charitable giving will be lower than is either 'locally' or 'globally' optimal in some cases and plausibly higher than optimal in others, depending on the effect of migration and expectations on wages. The self-selection nature of donor decision making does eliminate the usual interjurisdictional fiscal externality, though it leaves a role for government intervention via subsidies to altruistic behavior.

Land price differentials have long been used as a proxy for the value of environmental improvements in cost/benefit analysis. Both the empirical and theoretical literatures have largely ignored two important facts, however: Taxes financing local improvements are often distortionary, and amenities which influence property values in turn impact the fiscal budget, and hence the tax rate and final economic burden. Put another way, the economic cost of an improvement is endogenous to both the amenity level and the revenue structure. Extending the story in this direction for a system of open or closed spatial cities, the paper finds land rent measures to be a biased measure of the willingness to pay for amenities financed by either head taxes (benefit taxes), property taxes (excise taxes), or highway tolls (user fees). These results are used to correct the conventional specification of empirical property value regression models, which traditionally account for neither tax revenue effects nor the excess burden of distortionary taxation.

This paper examines theoretically the “welfare magnet” problem brought about by income redistribution in a small area, where disparities across jurisdictions in transfer policies may induce both recipient and resource migration. We show that the level of redistribution determined by majority rule may either rise or decline as household mobility increases, and that this level will be either higher or lower than the efficient level to an extent that depends on local market conditions, the social value of migrants, and the mobility of both the rich and the poor. In particular, an economy may benefit from the immigration of transfer recipients. We also derive the form of an efficient community-specific subsidy to transfers, which in some cases will be negative.

This paper extends project evaluation in a spatial urban economy to consider the more general case of distortionary public finances. If a local public improvement is financed at least in part by a distortionary property tax, we show that residential land prices do not accurately measure the value of land improvements—even when households are identical and the improvement is infinitesimally small. The magnitude and direction of the measurement error will depend on the second-order effects on aggregate demand via changes in population density at each location and on overall city size.

Nearly all public expenditure demand studies define the marginal price for publicly provided goods as the household's share of the local property tax burden, or what is often called the tax- price. Such a definition is at odds with two familiar facts: taxes are ordinarily distortionary, and property values are often influenced by the value of local services. This paper constructs a theoretically consistent marginal tax-price measure incorporating these considerations. The new measure demonstrates that previous estimates of the price and income elasticities of demand for public services are biased, except under very restrictive circumstances. Moreover, the direction of this bias will depend upon the actual incidence of public spending and the tenure status of residents.

A simple model of distortive local finance shows how lump-sum finance models are misleading, what information local prices contain in the presence of distortions, and the feasibility of adjusting observed property value changes to infer resident net benefits of public goods.

Robert Solow, on the popularity of rational expectations macro research: "If you are a graduate student or assistant professor, you have to study what's on the frontier, no matter where the frontier is. But tenured faculty don't have that excuse to be doing useless things." We nodded our heads, with the new knowledge that we didn't have much choice not to be doing useless research for several years -- if that's where the frontier happened to be -- but, if we were good at the useless stuff, would later. It seemed fair enough at the time. (p.s. Solow was by far the most engaging teacher of this group, as is widely known. In class it was so simple; afterward at home, rather less so.)

Peter Diamond, the premier US optimal tax theorist of his day, sitting in on (27 year old?) MIT assistant professor Larry Summers' lecture on social insurance (which they cotaught to all of 4 students!): "But Larry, doesn't that fly in the face of everything we know about optimal tax theory?" A quite vigorous exchange ensued, of which I understood not a thing, though I enjoyed every minute of it -- so I still push for cotaught courses, with both instructors attending, based on this experience. (p.s. Within the year, Summers was promoted to full professor at Harvard, perhaps the youngest ever at the time.)**

Dan McFadden, having filled all the room's blackboards with tiny equations, looking at his watch 5 minutes past the scheduled end of class: "Well, in the time I have left let's get through one more topic," and starts writing again. (McFadden won teaching awards from the grad students, was dissed by the undergrads -- dryly methodical for intro material but for the advanced stuff, he was the mother lode. How could you not let him go on and on?)_________________**On parenting, my favorite part of the NYTimes Magazine2003 profile of then Harvard president Larry Summers:

Larry Summers is not just an economist but, as one of his critics put it, an economist economist. ... he does not read serious fiction; he shows few signs of aesthetic sensitivity; he is a slovenly dresser and not a terribly tidy eater. Summers may well have the densest collection of economist genes of any man alive. Both of his parents are economists. And Paul Samuelson, his father's brother, and Kenneth Arrow, his mother's brother, each won a Nobel Prize for economics.

In one of our earliest conversations, I asked Summers if he thought that his distinctive habits of mind came from his upbringing. Summers does not find his own background a terribly interesting subject, and the question struck him as overly deterministic, but he did recall that if the family -- he has two brothers -- was stuck in traffic, one of his parents might ask, ''If there was one more lane, would that eliminate the traffic jam or simply increase the number of drivers who used the road?''

One of the Summers-haters told me he had heard that the family rated sunsets, but Summers said that that was a game his father played with Summers's children (no doubt fostering a third generation of economists).